THIS IS THE SITUATION THAT THE P&D TAX CREDIT WAS INTENDED TO ADDRESS, AND THE SITUATION THAT, TO A GREAT EXTENT, CONTINUES TO EXIST. ONE OF THE BEST FEATURES OF THE CREDIT IS THAT IT IS SPECIFICALLY DESIGNED TO ADDRESS THIS SITUATION. THE CREDIT IS ONLY FOR INCREASES IN R&D SPENDING; COMPANIES

THAT SIMPLY MAINTAIN THEIR CURRENT LEVEL OF SPENDING AND DON'T TRY FOR

REAL INNOVATION WILL NOT BE ABLE TO UTILIZE IT.

THUS, IF THE INCENTIVE

WORKS AS INTENDED, WE SHOULD SEE THOSE R&D FIGURES START TO MOVE OFF THEIR

PLATEAU AND START GOING UP AGAIN.

IT'S A LITTLE EARLY YET TO BE ABLE TO TELL FOR SURE WHETHER THE TAX CREDIT IS HAVING ITS INTENDED EFFECT. TAX RETURNS FOR THE YEARS IN WHICH

IT HAS BEEN IN EFFECT HAVE ONLY JUST BEGUN TO BE ANALYZED. REGULATIONS FOR THIS PROVISION WERE ONLY ISSUED LAST JANUARY AND ARE NOT YET FINAL, CREATING AN UNCERTAINTY WHICH MAY BE DETERRING SOME CON IPANIES FROM USING THE CREDIT.

HOWEVER, THE INDICATIONS SO FAR ARE ENCOURAGING,

EVERY YEAR, THE MCGRAW HILL COMPANY TAKES A SURVEY OF BUSINESS' PLANS FOR CURRENT AND FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES, THIS YEAR'S SURVEY HAS JUST COME OUT, AND WHILE IT IS NOT QUITE AS OPTIMISTIC AS LAST YEAR'S

PROJECTIONS, IT STILL CONTAINS GOOD NEWS ON THE P&D FRONT. DURING 1981

R&D EXPENDITURES BY THE MORE THAN 300 FIRMS SURVEYED BY MCGRAW-HILL INCREASED

BY 16,5%. LAST YEAR R&D SPENDING INCREASED BY 8.4%; THIS YEAR IT IS PROJECTED

TO INCREASE BY 8.2%.

IT IS IMPORTANT TO LOOK AT THESE FIGURES IN LIGHT OF RECENT ECONOMIC

EVENTS. FIRST OF ALL, THE BOOM IN R&D SPENDING THAT WAS GETTING UNDERWAY

IN 1981 COLLIDED SQUARELY WITH THE RECESSION. ALSO, THE INFLATION RATE

HAS SIGNIFICANTLY DECLINED, AND SPENDING PROJECTIONS HAVE BEEN ADJUSTED
DOWNWARD TO ACCOUNT FOR THIS. WHAT'S SIGNIFICANT, HOWEVER, IS THAT THESE
COMPANIES HAVE STILL, EVEN DURING A SEVERE RECESSION, CONTINUED TO SUBSTANTIALLY

, A
INCREASE THEIR R&D SPENDING. THIS RUNS DIRECTLY COUNTER TO THE USUAL TREND
DURING AND SHORTLY AFTER A RECESSION. USUALLY AT SUCH TIMES, SPENDING FOR
BOTH CAPITAL GOODS AND R&D IS CUT BACK, WITH FIRMS TENDING TO ELIMINATE
EXPENDI TURES THAT AREN'T TIED TO CURRENT OPERATIONS, DURING THIS RECESSION
HOWEVER, FIRMS WERE MAKING INCREASES IN R&D AT THE SAME TIME THAT THEY
WERE CUTTING CAPITAL SPENDING. THIS TREND WAS EXPECTED TO CONTINUE DURING
1983. THE REPORT ALSO FOUND THAT THE RATIO OF R&D TO CAPITAL OUTLAYS WAS
PROJECTED TO KEEP RISING THROUGH 1986,

THE REPORT ALSO NOTED THE POSSIBILITY THAT R&D SPENDING COULD ACTUALLY RISE FASTER THAN ENVISIONED BY CURRENT PLANS. THIS IS BECAUSE PLANS FOR UPCOMING YEARS WERE MADE DURING THE DEPTHS OF THE RECESSION AND MIGHT WELL CHANGE AS THE RECOVERY PROCEEDS, AND ALSO BECAUSE IT WOULD BE CONSISTENT

WITH PATTERNS IN RECENT HISTORY.

THE R&D TAX CREDIT CANNOT TAKE ALL OF THE CREDIT FOR THIS NEW TREND, OF COURSE, THE JUMP IN R&D SPENDING WAS GETTING UNDERWAY EVEN BEFORE IT WAS PASSED. But I AM CONVINCED THAT IT CONSTITUTED AN IMPORTANT ADDITIONAL STIMULUS.

I CAN SEE THE RESULTS IN THE HIGH TECHNOLOGY FIRMS IN MY OWN DISTRICT, COMPANIES LIKE 'ANG, DIGITAL, AND DATA GENERAL. THESE COMPANIES ARE REPORTING SIGNIFICANT INCREASES IN R&D SPENDING, INCREASES FAR BEYOND THE DOLLAR AMOUNT OF THE CREDIT. THESE INCREASES CAN BE SEEN BOTH IN ABSOLUTE DOLLARS AND AS

AN INCREASING PERCENTAGE OF SALES--AT A TIME WHEN SALES THEMSELVES ARE ALSO

GROWING

HAVE RECEIVED TESTIMONY FROM ONE OF THESE COMPANIES, MA COM, INC.,
A LEADING FIRM IN THE COMMUNICATIONS AREA, WHICH I UNDERSTAND WILL BE PART
OF THE WRITTEN RECORD OF THESE HEARINGS, I WOULD URGE THE COMMITTEE MEMBERS
TO STUDY THIS TESTIMONY CAREFULLY. IT STATES SPECIFICALLY THAT THE R&D TAX
CREDIT HAS ENCOURAGED MA COM AND COMPANIES LIKE IT TO UNDERTAKE RESEARCH
AND DEVELOPMENT EFFORTS WHICH THEY WOULD NOT OTHERWISE UNDERTAKE, FOR THIS
COMPANY, THE CREDIT, DURING THE TWO YEARS IT HAS BEEN IN EXISTENCE,
"HAS BECOME IMBEDDED IN THE THINKING" OF THE COMPANY'S SENIOR MANAGEMENT
AND "HAS HAD THE EFFECT OF HEIGHTENING THE CORPORATE PRIORITY FOR RESEARCH."

I THINK WE SHOULD MAKE SURE THAT THIS TREND CONTINUES, A SHORT SPURT OF INCREASED P&D SPENDING, FOLLOWED BY ANOTHER DROP OR PLATEAU, IS NOT GOING TO KEEP THE ECONOMY HEALTHY IN THE LONG RUN. E NEED A PERMANENT INCENTIVE. AND THE FACT THAT A SUNSET WAS WRITTEN INTO THE R&D TAX CREDIT PROVISIONS DOES NOT MEAN THAT THEY WERE NOT SUPPOSED TO BE A PERMANENT INCENTIVE. THE

PURPOSE FOR THE SUNSET WAS TO GIVE CONGRESS A CHANCE TO SEE WHETHER THE

TAX CREDIT ACTUALLY WORKED, AND WHETHER ANY OF ITS PROVISIONS NEEDED TO BE

ADJUSTED TO MAKE IT VORK BETTER. THERE MAY WELL BE ROOM TO IMPROVE THE CREDIT,

BY EXPANDING THE LIST OF QUALIFYING EXPENSES, FOR EXAMPLE; AND THIS IS SOMETHING WE SHOULD LOOK AT A LITTLE FURTHER DOIN THE ROAD. BUT FOR NOW OUR FIRST

PRIORITY MUST BE TO RECOGNIZE THE FACT THAT THE CREDIT IS WORKING AND THAT

WE SHOULD MAKE IT PERMANENT.

"HY ELIMINATE THE SUNSET NOW? WHY NOT WAIT UNTIL CLOSER TO 1985, WHEN WE CAN BE MORE SURE OF EXACTLY HOW THE TAX CREDIT IS WORKING? FOR ONE VERY

IMPORTANT REASON: HVE MUST CREATE A CLIMATE OF CERTAINTY FOP. THE BUSINESSES
THAT WILL BE USING THIS CREDIT, COMPANIES HAVE ALREADY BEEN GRAPPLING WITH A

GREAT DEAL OF ECONOMIC UNCERTAINTY AS THEY TRÝ TO PLAN THEIR FUTURE EXPENDITURES,
IT IS HARD FOR THEM TO PLAN THEIR R&D EXPENDI TURES WHEN THEY CAN'T EVEN BE
SURE WHAT THE TAX CONSEQUENCES WILL BE, THE COMPANIES IN MY DISTRICT TELL
ME THAT THE PLANNÍNG CYCLE FOR RESEARCH AND DEVELOPMENT RUNS ABOUT THREE TO
FIVE YEARS, WITH THE HEAVIEST EXPENDITURES OCCURRING IN THE LAST YEARS. THIS

MEANS THAT COMPANIES ARE ALREADY PLANNING NOW FOR EXPENDITURES THAT WILL FALL
BEYOND THE SUNSET DATE. AND, GIVEN THE POSSIBILITY THAT THE TAX CREDIT WILL

NOT BE EXTENDED BEYOND THAT DATE, MANY OF THESE COMPANIES WILL INEVITABLY
DECIDE AGAINST FURTHER INCREASES IN P&D SPENDING, IN FACT, ONE REASON WHY

IT DOES NOT MAKE SENSE TO WAIT FOR MORE DATA BEFORE EXTENDING THE CREDIT

IS THAT GIVEN THIS THREE-TO-FIVE YEAR CYCLE, SPENDING DECISIONS MAY ALREADY

BE BEING AFFECTED BY UNCERTAINTY OVER THE SUNSET, MAKING THE EFFECT OF THE

CREDIT APPEAR TO BE LESS THAN IT REALLY IS,

ANOTHER ARGUMENT MIGHT BE THAT WE SHOULD WAIT AND SEE WHAT THE ECONOMY LOOKS LIKE BEFORE EXTENDING THE CREDIT. WE'VE ALL BEEN WORRYING ABOUT WHAT THE DEFICIT IS GOING TO LOOK LIKE IN THE "OUT YEARS," AND THERE HAS BEEN TALK ABOUT MAKING SURE THAT TAXES AREN'T CUT ANY FURTHER DURING THOSE YEARS. THE R&D TAX CREDIT IS ESTIMATED TO COST CLOSE TO A BILLION A YEAR, AND I UNDERSTAND THAT A STUDY BY THE MATIONAL SCIENCE FOUNDATION RAISES THE POSSIBILITY THAT THE REVENUE LOSS WILL BE ABOUT TWICE THE JOINT Tax COMMITTEE ESTIMATES. BUT WHETHER THE FIGURE IS ONE BILLION OR TWO BILLION, I THINK THAT THE BENEFITS OF THE CREDIT ARE WELL WORTH THE PRICE. THIS IS A COST-EFFECTIVE MEASURE. THE RETURNS TO TNE ECONOMY IN INCREASED PRODUCTIVITY, INNOVATION, AND COMPETITIVENESS COULD FAR EXCEED THE COST OF PROVIDING THE INCENTIVE. BY CONTRAST, THE ACRS

AND LEASING PROVISIONS, EVEN AFTER TEFRA, WILL COST US $16 BILLION THIS YEAR AND $29 BILLION BY 1985, AND THE ECONOMIC BENEFITS HAVE PROVEN TO BE UNCERTAIN

AT BEST:

THE P&D TAX CREDIT IS A PERFECT EXAMPLE OF HOW A GOOD TAX EXPENDITURE SHOULD WORK. IT'I'S SPECIFICALLY TARGETED. IT IS COST EFFECTIVE. IT PROVIDES A CLEAR SIGNAL OF A GOVERNMENT POLICY ON WHICH THERE IS A WIDESPREAD CONSENSUS. BUT IF IT CONTINUES TO BE HAMPERED BY THE SUNSET PROVISION, IT CANNOT, BECAUSE OF THE RESULTING UNCERTAINTY, CONTINUE TO WORK IN THE MANNER IN WHICH IT WAS INTENDED! AND ITS BENEFICIAL EFFECTS. MAY BE ONLY TEMPORARY. IT IS ESSENTIAL THAT WE ACT NOW TO KEEP THIS IMPORTANT PROVISION IN PLACE AS A PERMANENT

PART OF THE TAX CODE,